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Court of Appeals to Board: Follow Your Governing Documents!

Actions not conforming with Declaration are not protected by Business Judgment Rule

March 29, 2018
by Stephen Davis

A recent decision by the Missouri Court of Appeals is a reminder to homeowners and condominium associations of the importance of reading and complying with their governing documents.

In November 2015, a group of homeowners sued the Lakewood Property Owners Association, Inc. in Lee’s Summit alleging that the Association’s Board increased the maximum assessment limit, set forth in the Association’s Declaration (recorded in 1973), without approval of the homeowners. The Declaration lays out a specific procedure to increase the assessment limit, either based upon:
(1) increases to the consumer price index (CPI); or
(2) a vote of the membership.

The Bylaws (adopted by the Board in 1973) provide a formula for calculating assessment limit increases based upon an increase in the CPI.

Trial Court

After trial, the Court ruled for the Association. The Court agreed that the Board’s interpretation of the Declaration and Bylaws “was made within [the Board’s] authority, in good faith, uninfluenced by any consideration other than an honest belief that the actions promoted the Association’s best interests, consistent with historical practice and, therefore, is protected by operation of the business judgment rule.”

The homeowners appealed.

Court of Appeal

On appeal, the homeowners claimed that the circuit court erred by determining that the Board’s action was protected by the business judgment rule. Specifically, the homeowners argued that the Board improperly increased the maximum assessment limit accounting for the cumulative CPI increase from 1973 to 2015, using the formula in the Bylaws. The homeowners alleged that the Declaration only allowed assessments to increase based upon the CPI increase over the previous year.

The Court of Appeals agreed with the homeowners, and determined that the Board’s calculations were ultra vires and not protected by the business judgment rule. Davis v. Lakewood Property Owners Association, Inc., 536 S.W.3d 743, 749 (Mo. App. W.D. 2017). The Court concluded:

The Declaration does not authorize the Board to increase the maximum annual assessment based upon the cumulative increases in the CPI since Lakewood’s inception. That the Board is using a formula set forth in the Bylaws to calculate the maximum annual assessment in this manner does not make the calculation authorized, as the Bylaws state that, where the Declaration and Bylaws conflict, the Declaration controls.

Id.

Business Judgment Rule

Under Missouri law, the business judgment rule “protects the directors and officers of a corporation from liability for intra vires decisions within their authority and made in good faith, uninfluenced by any consideration other than an honest belief that the action promotes the corporation’s best interest.” Virgil Kirchoff Revocable Trust Dated 06/19/2009 v. Moto, Inc., 482 S.W.3d 834, 841 (Mo. App. E.D. 2016).

The courts will not interfere “with the decisions of corporate officers and directors absent a showing of fraud, illegal conduct, an ultra vires act, or an irrational business judgment.” Id. at 842 (citation omitted).

The Court explained that ultra vires “includes not only acts prohibited by the charter [of the corporation], but acts which are in excess of powers granted and not prohibited.” Davis, 536 S.W.3d at 747 (citation omitted).

Missouri Supreme Court

The Association then sought transfer to the Missouri Supreme Court for a hearing before that Court. On January 23, 2018, the Court denied the Association’s application.

Final Judgment

On February 1, 2018, the Circuit Court entered its Judgment Upon Remand, “that the Defendant’s calculation of assessments is ultra vires and, therefore, not protected by the business judgment rule.” The Court entered judgment for the owners and assessed court costs against the Association.

Bottom line: Board Members should carefully read their governing documents and present any questions to counsel experienced in representing homeowners and condominium associations. Otherwise, the Association may accidentally find its way into a timely and expensive multi-year court case with multiple appeals.

Stephen Davis is an Associate in the Litigation practice group at Carmody MacDonald. As a trial lawyer, he represents businesses and individuals in a wide variety of business disputes.

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